Call for Multi-Stakeholder Communication to Establish a Governance Mechanism for the Emerging Blockchain-Based Financial Ecosystem, Part 2 of 2

Abstract

Financial regulators around the world regulate financial intermediaries and activities to achieve their regulatory goals including investor/consumer protection, financial stability and prevention of financial crimes, and in so doing address various market failures. These objectives are needed in the social interest regardless of the technologies used by the financial system. Blockchain technology and any financial ecosystem based on it have technical characteristics including decentralization, autonomization, anonymization and globalization, which could undermine the ability of regulators to achieve regulatory goals. Especially when it comes to preventing financial crimes, these characteristics could have significant negative impact on the ability of regulators. The intergovernmental Financial Action Task Force (“FATF”) recognizes these issues and is tackling them by issuing multiple guidelines; however, it seems that such efforts are falling behind rapid technological developments. Thus, financial regulators must discover ways to achieve regulatory goals even in a blockchain-based financial ecosystem. This situation is similar to the case of telecommunication regulators during the rise of the Internet. The Internet complicated their regulatory goals including intellectual property rights protection and contents regulation. Thus, their relevant experiences provide a good reference. In the face of such difficulties in cyberspace, it was suggested to invoke not just law but also social norms, market mechanisms and architecture (software and hardware) to achieve a certain level of oversight. In fact, various stakeholders cooperated towards utilizing these modes of oversight in order to address issues brought by the Internet. Based on the lessons from the Internet, financial regulators should recognize that cooperation between multi-stakeholders would be beneficial for them, and they should actively play a role towards establishing a cooperative environment among stakeholders. Especially because code embedded in a blockchain system could determine the level of oversight on the activities within a blockchain-based financial ecosystem, regulators should consider ways to cooperate with engineering communities developing code despite often disparate incentives and mindsets. Once regulators successfully establish a cooperative relationship with the engineering community and can together develop code that facilitates mechanisms to achieve regulatory goals, they still must empower society to use such code in order to actually achieve regulatory goals, which requires consideration on alignment with social norms and market competitiveness; thus, regulators must cooperate with other stakeholders including businesses and users. Through these considerations, this paper concludes that regulators should establish multi-stakeholder governance mechanisms within a blockchain-based financial ecosystem by improving cooperation among stakeholders. The final part of this paper provides some thoughts on relevant open questions, which we will continue to work on.